FIN 614 Midterm 1 | Assignment help | Kogod school of business
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FIN 614 Midterm 1 | Assignment help | Kogod school of business
Midterm
1
FIN 614– Financial
Management
True/False and Multiple Choice (45
points)
Choose the best answer
for each of the following questions.
Each question is worth 3 points.
1.
A time line is not meaningful unless all
cash flows occur annually.
o
True
o
False
2.
If the discount (or interest) rate is
positive, the present value of an expected series of payments will always
exceed the future value of the same series.
o
True
o
False
3.
The greater the number of compounding
periods within a year, then (1) the greater the future value of a lump sum
investment at Time 0 and (2) the greater the present value of a given lump sum
to be received at some future date.
o
True
o
False
4.
Suppose Sally Smith plans to invest
$1,000. She can earn an effective annual rate of 5% on Security A, while
Security B has an effective annual rate of 12%. After 11 years, the compounded
value of Security B should be more than twice the compounded value of Security
o
True
o
False
5.
The present value of a future sum
decreases as either the discount rate or the number of periods per year
increases, other things held constant.
o
True
o
False
6.
All other things held constant, the
present value of a given annual annuity decreases as the number of periods per
year increases.
o
True
o
False
7.
If we are given a periodic interest rate,
say a monthly rate, we can find the nominal annual rate by multiplying the
periodic rate by the number of periods per year.
o
True
o
False
8.
As a result of
compounding, the effective annual rate on a bank deposit (or a loan) is always
equal to or less than the nominal rate on the deposit (or loan).
o
True
o
False
9.
When a loan is amortized, a relatively
high percentage of the payment goes to reduce the outstanding principal in the
early years, and the principal repayment's percentage declines in the loan's
later years.
o
True
o
False
10.
The payment made each period on an
amortized loan is constant, and it consists of some interest and some
principal. The closer we are to the end of the loan's life, the greater the
percentage of the payment that will be a repayment of principal.
o
True
o
False
11.
Midway through the life of an amortized
loan, the percentage of the payment that represents interest must be equal to
the percentage that represents repayment of principal. This is true regardless
of the original life of the loan or the interest rate on the loan.
o
True
o
False
12.
Which of the following statements is
CORRECT?
o
Some of the cash flows shown on a time
line can be in the form of annuity payments, but none can be uneven amounts.
o
A time line is not meaningful unless all
cash flows occur annually.
o
Time lines are useful for visualizing
complex problems prior to doing actual calculations.
o
Time lines cannot be constructed in
situations where some of the cash flows occur annually but others occur
quarterly.
o
Time lines cannot be constructed for
annuities where the payments occur at the beginning of the periods.
13.
You have $5,000 invested in a bank that
pays 3.8% annually. How long will it take for your funds to triple?
o
23.99
o
25.26
o
26.58
o
27.98
o
29.46
14.
Your investment account pays 8.0%,
compounded annually. If you invest $5,000 today, how many years will it take
for your investment to grow to $9,140.20?
o
5.14
o
5.71
o
6.35
o
7.05
o
7.84
15.
You plan to work for Strickland
Corporation for 12 years after graduation and after that want to start your own
business. You expect to save and deposit $7,500 a year for the first 6 years (t
=
1
Through t = 6) and $15,000 annually for
the following 6 years (t = 7 through t = 12). The first deposit will be made a
year from today. In addition, your grandmother just gave you a $25,000
graduation gift that you will deposit immediately (t = 0). If the account earns
9% compounded annually, how much will you have when you start your business 12
years from now?
o
$238,176
o
$250,712
o
$263,907
o
$277,797
o
$291,687
True
or False & Multiple Choice (30 points)
Choose the best answer
for each of the following questions.
1.
The annual report contains four basic
financial statements: the income statement, balance sheet, statement of cash
flows, and statement of stockholders' equity.
o
True
o
False
2
Which of the following statements is
CORRECT?
o
Net cash flow (NCF) is defined as follows:
NCF
= Net income - Depreciation and Amortization.
o
Changes in working capital have no effect
on free cash flow.
o
Free cash flow (FCF) is defined as follows:
o
FCF = EBIT(1 − T)
o
+ Depreciation and Amortization
o
Capital expenditures required to sustain
operations
o
Required changes in net operating working
capital.
o
Free cash flow (FCF) is defined as
follows:
FCF = EBIT(1 − T)+
Depreciation and Amortization + Capital expenditures.
o
Net cash flow is the same as free cash
flow (FCF).
3.
Danielle's Sushi Shop last year had (1) a
negative net cash flow from operations, (2) a negative free cash flow, and (3)
an increase in cash as reported on its balance sheet. Which of the following
factors could explain this situation?
o
The company had a sharp increase in its
depreciation and amortization expenses.
o
The company had a sharp increase in its
inventories.
o
The company had a sharp increase in its
accrued liabilities.
o
The company sold a new issue of common
stock.
o
The company made a large capital
investment early in the year.
4.
TSW Inc. had the following data for last
year: Net income = $800; Net operating profit after taxes (NOPAT) = $700; Total
assets = $3,000; and Total operating capital = $2,000. Information for the
just-completed year is as follows: Net income = $1,000; Net operating profit
after taxes (NOPAT) = $925; Total assets = $2,600; and Total operating capital
= $2,500. How much free cash flow did the firm generate during the
just-completed year?
o
$425
o
$468
o
$514
o
$566
5.
Bae Inc. has the following income
statement. How much net operating profit after taxes (NOPAT) does the firm
have?
Sales $2,000.00
Costs 1,200.00
Depreciation 100.00
EBIT $ 700.00
Interest expense 200.00
EBT $ 500.00
|
Taxes (35%) |
175.00 |
|
Net income |
$ 325.00 |
o
$370.60
o
$390.11
o
$410.64
o
$432.25
o
$455.00
6.
Which of the following statements is
CORRECT?
a.
"Window dressing" is any action
that improves a firm's fundamental, long-run position and thus increases its
intrinsic value.
b.
Borrowing by using short-term notes
payable and then using the proceeds to retire long-term debt is an example of
"window dressing." Offering discounts to customers who pay with cash
rather than buy on credit and then using the funds
7.
Considered alone, which of the following
would increase a company's current ratio?
o
An increase in accounts payable.
o
An increase in net fixed assets.
o
An increase in accrued liabilities.
o
An increase in notes payable.
o
An increase in accounts receivable.
8.
Nikko Corp.'s total common equity at the
end of last year was $305,000 and its net income after taxes was $60,000. What
was its ROE?
o
16.87%
o
17.75%
o
18.69%
o
19.67%
Pettijohn
Inc.
The balance sheet and
income statement shown below are for Pettijohn Inc. Note that the firm has no
amortization charges, it does not lease any assets, none of its debt must be
retired during the next 5 years, and the notes payable will be rolled over.
Balance
Sheet (Millions of $)
Assets
2016
Cash and securities $ 1,554.0
|
9,660.0 |
|
|
|
|||
|
Inventories |
13,440.0 |
|
|
|
|
|
|
Total current assets |
$24,654.0 |
|
|
|||
|
Net plant and equipment |
|
17,346.0 |
|
|||
|
Total assets |
$42,000.0 |
|
|
|
|
|
|
Liabilities
and Equity |
|
|
|
|
||
|
Accounts payable |
$ |
7,980.0 |
|
|
||
|
Notes payable 5,880.0 |
|
|
|
|
|
|
|
Accruals |
4,620.0 |
|
|
|
|
|
|
Total current
liabilities |
|
$18,480.0 |
|
|||
|
Long-term bonds |
10,920.0 |
|
|
|||
|
Total liabilities |
$29,400.0 |
|
|
|||
|
Common stock |
3,360.0 |
|
|
|
||
|
Retained earnings |
|
9,240.0 |
|
|
||
|
Total common equity
$12,600.0 |
|
|
||||
|
Total liabilities and
equity |
$42,000.0 |
|
||||
|
Income
Statement (Millions of $) |
2016 |
|||||
|
Net sales |
$58,800.0 |
|
|
|
|
|
|
Operating costs except
depr'n $54,978.0 |
|
|||||
|
Depreciation |
$ 1,029.0 |
|
|
|
|
|
|
Earnings bef int and
taxes (EBIT) |
$ |
2,793.0 |
||||
|
Less interest |
1,050.0 |
|
|
|
|
|
|
Earnings before taxes
(EBT) |
$ 1,743.0 |
|
||||
|
Taxes $
610.1 |
|
|
|
|
|
|
|
Net income |
$ 1,133.0 |
|
|
|
|
|
|
Other data: |
|
|
|
|
|
|
|
Shares outstanding
(millions) 175.00 |
|
|
||||
|
Common dividends |
$ |
509.83 |
|
|
||
|
Int rate on notes
payable & L-T bonds |
6.25% |
|||||
|
Federal plus state
income tax rate |
35% |
|||||
|
Year-end stock price |
$77.69 |
|
|
|
||
9.
Refer to the data for Pettijohn Inc. What
is the firm's ROA?
o
2.70%
o
2.97%
o
3.26%
o
3.59%
o
3.95%
10.
Refer to the data for Pettijohn Inc. What
is the firm's ROE?
o
8.54%
o
8.99%
o
9.44%
o
10.41%
Short
Answer (25 points)
Each question is worth 5
points. Do not write more than 4 to 5 sentences, just focus on answering the
question.
1.
You
observe that a firm's ROE is above the industry average, but its profit margin
and debt ratio are both below the industry average. Which of the following
statements is CORRECT? Please explain in 4 to 5 sentences
o Its total assets turnover must equal the industry average.
o Its total assets turnover must be above the industry
average.
o Its return on assets must equal the industry average.
o Its TIE ratio must be below the industry average.
o Its total assets turnover must be below the industry
average.
2.In the spirit of financial intermediaries, compare and contrast the
basic functions and clients of a classic investment bank (e.g., Goldman Sachs)
with a classic commercial bank (e.g., Bank of Bethesda). Again, as financial
intermediaries, how do commercial banks and investment banks generally differ,
if at all, from insurance companies, venture capital funds, or public pension
funds?
Investment banks’ main
objectives are to aid both corporations and governments in gaining capital from
the marketplace. Commercial banks accept deposits and issue out loans to
people, government entities, and corporations.
3)
Discuss
“securitization” in the context of that in which a commercial (Hint:
collateralized
mortgage obligation circa 2006) and an investment bank may engage. What are two
reasons—of many—why securitization likely occurs with financial intermediaries?
4)
Compare
and contrast mutual funds and hedge funds (clients, risk, minimum
investment,
etc.). Give an example of a provider of each fund. Why might you not presently
be a hedge fund client?
5)
Historically,
Stocks have returned more than bonds and cash. What is the likely reason for
the return differences between cash, fixed income, and equities?
USA 
India
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